Comovement between the U.S. and Asia-Pacific Stock Markets: Evidence from the Sector ETFs

This paper examines sector integration and spillover effects between the U.S. and Korean, Chinese, Japanese, and Taiwanese Exchange Traded Funds (ETFs) in the financial and technology sectors within the sample period of Jan. 2006- Dec. 2013. The results show that, before the global financial crisis, U.S. financial and technology ETFs had a weak co-integration relationship with Asian sector ETFs. However, after the global financial crisis, the co-integration relationship became strong for Korean, Japanese, and Taiwanese sector ETFs, but not for China, confirming that a financial crisis leads stock markets to become more closely related than before the crisis. Granger causality tests show that there are unilateral causal relationships from U.S. sectors to Asian sector ETFs with no reverse causality, suggesting that, in the short term, U.S. sector performance has an impact on Asian sector ETFs. It is found that there are return and volatility spillover effects from U.S. to Asian sector ETFs, indicating a strong linkage relationship between U.S. and three Asian countries’ sectors, supporting the argument that these Asian countries are heavily dependent on U.S. economic conditions. The co-integration and spillover tests show that Chinese sector ETFs are diverging away from U.S. sector ETFs, implying that China dictates its economy on its own terms.